The Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16, 201-208, 301-307) provides the basic legal principles applicable to arbitration in the US. Its core principle is that arbitration agreements involving interstate or foreign commerce must be considered "valid, irrevocable, and enforceable, save as upon such grounds as exist at law or in equity for the revocation of any contract" (9 U.S.C. § 2). This principle is supported by provisions requiring the courts to stay proceedings before them that involve matters referable to arbitration and to issue orders requiring the arbitration of these matters (9 U.S.C. §3) and to compel arbitration (9 U.S.C. §4).

The developer of a condominium project on the island of Maui, a joint venture affiliated with Marriott International, Inc. and the Ritz-Carlton Development Company, sold ten of the condominium units to individual purchasers and retained 56 units. The condominium association and individual owners sued the developer when it defaulted on certain loans encumbering the project, failed to pay several months of condominium maintenance and operator fees, and withdrew approximately $1.3 million from the condominium association when it withdrew from the project. In response to the condominium association's lawsuit, the developer moved in court to stay the court litigation and compel arbitration.

When the owners purchased their units from the developer, they each executed a Purchase Agreement. Each Purchase Agreement incorporated by reference certain documents relating to the governance of the project, including:

The Purchase Agreements contained no arbitration clause. Instead, it stated that "[v]enue for any cause of action brought by the Purchaser hereunder shall be in the Second Circuit Court, State of Hawaii." The Purchase Agreement also contained 20 references to the Declaration, which did contain an arbitration clause, which, among other things:

The Purchase Agreements also incorporated by reference:

The developer defaulted on loans and the homeowners claimed the developer withdrew over a million dollars from the association's operating fund. The homeowners sued for breach of fiduciary duty and other claims. In response, the developer moved to compel arbitration.

The court refused to compel arbitration, holding that the arbitration clause the Declaration was ambiguous when considered in the context of the court venue provisions in the Purchase Agreement and the Public Report.

The court also held that the Declaration's arbitration clause was both procedurally and substantively unconscionable, noting that:

This case marks Hawaii as one of the US states most disfavoring arbitration. It also sounds a cautionary note to practitioners drafting arbitration agreements, to include a strong severability clause to ensure that a court's finding of unconscionability in one provision, such as a limitation on discovery or punitive damages, will not invalidate the entire arbitration agreement.